Millennials, Boomers, Technology to Reshape Self-Storage Industry in 2018, According to Leading Investor

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Leading investor and CEO of Cash Flow Connections, a real estate private equity firm that focuses on investing in self-storage facilities and mobile home parks, shares how three major trends in 2018 will reshape the self-storage industry.

Even though self-storage is relatively new compared to other real estate asset classes, it has proven that it can provide reliable and stable returns for investors. However, some of these 2018 trends may significantly impact the business and smart investors can benefit by factoring them into their i

The self-storage industry will be reshaped by three major trends in 2018, according to Hunter Thompson, CEO of Cash Flow Connections, a real estate private equity firm that focuses on investing in self storage facilities and mobile home parks. These trends are:

1. Apps Facilitate On-Demand Service -- One of the hottest topics in the self-storage field is on-demand self-storage startups. Companies like MakeSpace, BruteStorage and Clutter are all making waves in the sector by providing storage through an app-based, on-demand platform. These companies pick up their customers' items from their homes, store the items in a secure warehouse in a location where rental rates are comparatively less expensive, and then return the items when customers request them. The price differential between storage warehouse rental rates near the pickup location and at a more remote location allows these companies to offer the service at competitive rates while still providing the on-demand experience.

Millenials are accustomed to accessing apps for all manner of services and storage is no exception. As the use of these apps becomes more mainstream, and as its younger users continue to acquire more storable goods, there will be significant pressure on self-storage operators to reduce prices, particularly those who have focused for decades on purchasing and developing self-storage facilities in highly desirable urban markets.

Currently this business model is only viable in markets where there is a significant differential between the rental rates of the city hub when compared to warehouses in a more industrial neighborhood. For example, it is common to see self-storage rates in Manhattan, NY that are 400% higher than rental rates of a relatively nearby Brooklyn warehouse. However, in a market like Fayetteville, NC, the difference between the city-center rates and those of a warehouse in a nearby suburb may be less than 20%, completely eliminating the potential profit margin when you include the costs of operating the on-demand service.

2. Technology Spurs Automation -- One of the major upcoming trends in self-storage is the move towards automation. In an effort to leverage technological advances to increase operational efficiencies, many self-storage operators are fully or partially automating their properties. Proponents of this strategy claim that using automation can significantly increase net operating income, most notably by eliminating the salary of the on-site property manager -- usually saving $50,000-$60,000 each year.

However, this strategy comes with a potential downside. It is very unlikely that an automated system will be able to convincingly upsell customers on premium products such as larger units, climate-controlled spaces or drive-in access. Additionally, there are ancillary income items like U-Haul rentals and tenant insurance, which a kiosk may not be able to sell as effectively as a human. U-Haul rentals alone can account for $3,500+ per month in additional net income, so it is still unclear what the end result of fully automating will be to the bottom line. It is certainly something investors should keep their eyes on since we all recognize that technology has disrupted most business models in recent years.

3. Baby Boomers Downsize -- The Baby Boomer phenomenon creates a unique data point when analyzing the self-storage asset class for a few reasons. As most investors are aware, there are 10,000 baby boomers hitting the age of 65 each day and projected to do so for the next 15 years. It is very likely that this demographic shift will result in significant downsizing among Baby Boomers over the next several decades. This should be a positive for self-storage investors as downsizing is one of the most frequently cited causes for a customer to use self-storage.

Markets like Florida and Arizona that are destinations for more affluent retirees should experience the largest increases in demand for self-storage centers and they will seek premium facilities with the most services.

“Even though self-storage is relatively new compared to other real estate asset classes, it has proven that it can provide reliable and stable returns for investors. In fact, same-store income growth in self-storage has significantly outpaced multi-family, office, and retail since The Great Recession. However, some of these 2018 trends may significantly impact the business and smart investors can benefit by factoring them into their investment thesis,” concludes Thompson.

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Barbara Casey
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